Q1 2024 was characterized by rising interest rates. The market’s certainty that the central banks worldwide are closing in on cycle of interest rate cuts was challenged by a relatively modest but seemingly resilient growth and a strong risk sentiment. The steady increase in the prices for services also highlighted the risk that inflation can become entrenched at levels that are too high. We stand firmly behind our assessment that a further broad downturn in economic activity, declining profit margins and higher unemployment is necessary to return inflation to target levels. However, the impact of the monetary policy has a time lag and we expect the full effects of previous rate hikes to become clearer during the upcoming quarters.
However, the strong risk sentiment and the subsequent recovery in the general sentiment increases the risk that the downturn in inflation can prove to be slower than expected, which may be a significant challenge for both central banks and markets going forward.
The fund remains positioned for a steeper yield curve and we believe that the position provides good protection against clear economic headwinds, a high risk for a recession and a vulnerable market sentiment. Our assessment is that the Riksbank will begin to cut rates during the summer. At the same time, the weaker outlooks for public finances and the Riksbank’s active sale of government bonds will continue to increase the supply of these bonds. As a result, we are maintaining an overweight in other AAA-rated bonds, such as covered mortgage bonds and bonds issued by Swedish municipalities. In an effort to further increase the fund’s resilience, we increased the fund’s duration in short-term bonds and continued to reduce the exposure in less liquid bonds that are more reliant on a positive risk appetite.